Future financial advice models that marry the best of technology and human intervention require considered thought and a disciplined approach to development. Here, Angat Sandhu outlines the experience and varied success of robo-advice and face-to-face propositions, and presents some key considerations for players in the Australian market.
From a customer’s perspective, the challenges with existing financial advice models are well known:
Affordability: High costs for provision of financial advice
Lack of trust: Industry’s reputation not helped by recent scandals and adverse media coverage
Poor customer experience: Cumbersome manual processes requiring significant time and provision of information
Narrow focus: Limited integration across banking, insurance, wealth and personal financial management needs resulting in focus of advice being narrow and siloed.
The end result of the above is that fewer customers are seeking financial advice. In addition, regulatory scrutiny of the sector has increased and whilst it is trying to uplift the reputation of the sector, it is resulting in an increase in cost and compliance for advisers, and partly exacerbating the above customer outcomes.
Robo-advice has been spoken about as the ‘solution’ for many years, but has struggled to take share from the traditional face-to-face advice channel.
Some of the pioneers in this field: Wealthfront and Betterment in the US, and Nutmeg in the UK, have experienced rapid growth but collectively still only account for a very small fraction of the market. One argument that has been put forward is that the robo-players are focusing on a new customer segment i.e. self-directed individuals (often, but not always, the millennials) that are looking for low cost investment options and not in need of face-to-face financial advice. Whilst the jury is still out on the growth potential of this segment but that hasn’t prevented investment in this space by incumbents and emergence of a significant number of new players seeking to disrupt the status quo.
Conversely, the traditional face-to-face financial advice models are viewed to be focused on those with more complex needs and the means to pay for financial advice costs. Estimates vary, but it is believed that ~15-25% of the adult population in Australia use a financial adviser.
Whilst players may disagree on the future growth potential of both the segments (robo and face-to-face), there is consensus amongst wealth managers that there is a reasonably large ‘missing middle’ segment that would potentially seek financial advice provided the right proposition could be developed, at a materially lower cost and delivered in a hassle-free manner.
Global perspectives: Is anyone winning?
On one hand, almost every large wealth manager is focusing on developing some version of a digital or hybrid advice solution. There are very early signs of success through some of the large players in the US, who are developing ‘bionic models’ that marry the best of technology but retain the key human elements to provide financial advice.
The most successful model of the above to date is Vanguard Personal Advisor Services that has accumulated ~$A65BN AUM just two years after launching. They offer a goals focused, self-guided online tool which provides personal, human-led planning and investments in a consistent, digitally powered and mobile friendly way. The digital portal is supported by ~500 salaried advisers who are either already certified financial planners or in the process of becoming one.
Charles Schwab’s recently announced Intelligent adviser services is aiming to take this one step further and offer one face-to-face meeting with the adviser as part of its proposition and more frequent access by video / over the phone.
The most compelling component of both these players’ offerings are the relatively low costs for provision of financial advice, with Vanguard charging $US1000 for <$50K AUM and only $US250 for $50-$500K AUM. What is also interesting about both these players is that majority of their customers (existing and target) are 50+ rather than millennials / younger segments that are often associated with robo like offerings.
Many of the incumbents with large adviser bases / relationships such as UBS are focusing on reducing the cost to serve through focus on wide-scale automation of as many activities across the advice process as possible. Relatedly, players are also focusing on using data analytics to enhance adviser productivity.
It is worth bearing in mind that a number of these players benefit from structural advantages of being large, having a sizable customer base and operating in markets that are materially larger than the Australian market. These players and others like them have had some early success and whilst questions will remain about how sustainable they are over the long-term, they do provide some lessons for Australian players to consider.
Considerations for players in the Australian market
Despite the structural advantages in many other markets, there are four key considerations for Australian wealth managers as they go about developing similar offerings:
- Clarity in ambition: Organisations and especially those that manufacture products need to clearly articulate their future ambition around provision of financial advice, especially around:
- Which customer segments are they targeting?
- How will advice be provided to each segment?
- What is their role versus those of external parties (e.g. IFAs)?
The ambition statements need to carefully consider elements that can directly be controlled by the organisation (e.g. development of propositions) versus those that can’t / shouldn’t (e.g. IFA behaviour) and go well beyond motherhood statements like ‘omni-channel’ and ‘goals-based’.
- Size the opportunity and contestable landscape: Be ruthless in determining the financial size of the opportunity across each customer segment and split across products, platforms and financial advice (planners and dealer groups).
- Be clear on source of competitive advantage: Critically challenge yourself to identify own source of competitive advantage versus the rest of the market. The more visible and tangible this is, the easier generally it is to monetise.
- Be honest about ability to deliver: Many an organisation has run an ‘Advice transformation’ programme that has not yet delivered the benefits that were anticipated. For some, lack of clarity on #1-3 above has contributed to the above. Irrespective of that, the reality is that developing a compelling offering at a materially lower cost for a new customer segment not only requires investment in technology but driving fundamental change within an organisation, in customer engagement and adviser behaviour. The above is extremely challenging for most organisations and they should look to augment existing capabilities with appropriate partners to de-risk execution.
There is no doubt in my mind that financial advice models will continue to evolve and in the future ‘bionic models’ that marry the best of technology and human intervention will be the norm. Equally, it is also clear that development of these models is challenging and requires considered thought. Players that can take a disciplined approach to development of these models not only stand to benefit financially but also provide peace of mind to millions of Australians.
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